Although in its early stages, European Financial Reform is rapidly developing. There are challenges unique to the European Union in terms of jurisdictional complexity that make Dodd-Frank look like a stroll in the park. Providing regulatory oversight without stepping on nationalist toes will be some trick indeed.

In spite of the obvious obstacles, the EU is moving forward. In December the European Parliament moved legislation that created the European Systemic Risk Board. The ESRB is part of the European System of Financial Supervision (ESFS), the purpose of which is to ensure the supervision of the Union’s financial system. The ESRB closely resembles the Financial Stability Oversight Council, which was created by the Dodd-Frank Act. It will be responsible for the macro-prudential oversight of the financial system within the EU in order to assist in the prevention or mitigation of systemic risks to financial stability in the EU.

This month, the European Parliament established three new European Supervisory Authorities: the European Banking Authority, the European Securities and Markets Authority, and the European Insurance and Occupational Pensions Authority. These are the guys that will be setting the technical standards for financial institutions. They will work very closely with the ESRB in laying the groundwork for the new regulatory policies. One key stipulation that the ESAs must abide by is that they must ensure that no decision impinges on the fiscal responsibilities of EU member states. I can see situations arising where a national interest and a rule issued by an ESA may be at odds. One wonders what the reconciliation process will be like.

In order for these newly established entities to be effective the EU will need to come up with joint data standards. Data standards across national supervisory bodies have long been considered a kind of Achilles’ heel for the EU. With 27 member states, it will be interesting to see how the data standards develop – I can’t get my family to agree on lunch.

What About Derivatives?

Regarding the regulation of derivatives we see the European Commission proposing rules similar to those seen in Title VII of Dodd-Frank. Through the MiFID (Markets in Financial Instruments Directive) revision proposals we see the central themes of greater transparency, central clearing and reduced operational risk clearly taking shape.

Trade Repositories

European entities will be subject to mandatory reporting of OTC derivative trades to central data centers. Very much like its US counterpart, the Swap Data Repository, the trade repository will collect position information by derivative class and publicly disseminate the information. It will be the responsibility of the European Securities and Markets Authority to govern these repositories.

Central Clearing

Very much like in Dodd-Frank, over-the-counter derivatives that can be cleared must be cleared through central counterparties. Eligible transactions will include those that are standardized or that possess a high level of liquidity.

Operational Risk

The European Commission’s proposal strongly promotes the use of electronic means for the timely confirmation of the terms of OTC derivatives contracts as a means of reducing operational risk. Entities should develop and maintain an organizational structure, internal controls and a reporting system suitable for the identification, assessment, control and monitoring of operational risks in market-related activities.

When?

Prompted by the 2009 G-20 agreement that stated – “all standard OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest”, the European Commission has made it clear that it intends to stick to that time frame.

There was a very interesting article in The Times about industrial manufactures raising prices due to the soaring cost of raw materials.

I’ve noted in the past about Food and Beverage companies being affected by rising and volatile commodity prices – and the news continues - McDonald’s CFO, Pete Bensen, said on a recent earnings conference call that it will raise prices this year in the face of rising commodities costs.

But I haven’t seen many articles about the effects of rising commodity costs on industrial manufacturers. The Times article presents a call-out case study of Norton Motorcycles. “A motorcycle is constructed 60% (by weight) from aluminium, 20% from steel, and the remainder from a combination of plastics, rubber, paint and other materials.”

The article also lists the cost increases for these materials in the last year:

Rubber (tires) 73%

Steel (frame) 29%

Aluminium (engine casting) 8%

Plastic (fuel tank) 7%

lan McCafferty, the CBI's chief economist, said: "Manufacturers have come under intense pressure to pass on rising costs. They have increased prices markedly in this quarter and expect to raise them at an even faster pace over the next three months.”

The focus for supply chain groups over the last 15+ years has been on efficiency and speed. Manufacturing and supply chain techniques such as — Just in Time (JIT) inventory management, Total Quality Management (TQM), Six Sigma and Demand Driven Supply Network (DDSN) — were introduced to eliminate waste, reduce inventory and improve quality. These efforts have led to a striking reduction in buffer inventories to bare minimum levels. In addition, these leaner supply chains have become more global as organizations look for lower cost suppliers and new markets to sell product. On one hand, this has reduced costs and opened new markets but on the other hand it has significantly limited the ability of businesses to handle unforeseen shocks to the system such as sharp raw material price rises and volatility.

The Triple Point solution brief discusses how automotive manufacturers and suppliers (really applicable to all industrial manufacturers) are facing unprecedented fundamental changes in metals, chemicals, plastics and energy market environments. In this “new-normal,” industrial manufacturers need to recognize how the same systems that have historically been deployed by energy and commodity trading companies can help them manage raw material risk and preserve profit margins.

For those of you who follow Triple Point news, you might have recently seen that Triple Point recorded record revenue for 2010. Following our recent announcement, Dr. Gary M. Vasey of CommodityPoint posted this blog with some interesting observations on Triple Point’s growth over the last three years and his perspective on how Triple Point has found success in a difficult industry.

Gary points out that, “a quick review of the company’s previous years announcements shows that Triple Point is successfully growing on a consistent basis recording 21 new clients in 2008, 36 in 2009 and 41 in 2010. Additionally, the company has seen recurring software revenue growth of 72% in 2008, 55% in 2009 and 37% in 2010 as well as growth in profits each year.”

Everyone at Triple Point is very proud of our growth over the past 3 years and our record revenue in 2010, especially in the face of the recent financial crisis. In addition to our record-setting revenue in 2010, we also charted record profits and software sales driven by product innovation, new market penetration, and strong customer support.

2010 Highlights from the recent announcement include:

- 41 new customers signed

- 52% year-over-year EBITDA growth

- 64 customer go lives

- 105 new license transactions

- 500% year-over-year customer growth in EMEA; 400% in EMEA

In case you missed the announcement, you can read the full announcement here.

I recently read a speech titled, "There Is More Than One Inconvenient Truth" by Thomas F. Farrell II, the Chairman, President and CEO of Dominion. I highly recommend everyone take a few minutes to at least scan the script - click here to read the speech.

Mr. Farrell makes the point that we need a rational energy policy (which we don’t have) and will never get there unless we can move past slogans such as ‘Fossil fuels, bad; renewable energy, good’ and have an intelligent debate on the subject.

All industry forecasts show a rapid growth in the overall energy requirements around the world over the next 20 years. In order to meet the increase in energy needed, there will be growth in the use of fossil fuels – the usage of fossil fuels is not going away, it is actually growing (although at a slower rate). Fossil fuels in 2030 will still represent roughly 80% of the fuel mix. Although renewable fuels will grow at a faster pace, they will still only represent around 20% of the mix. It’s hard to argue against a clear-headed debate.

In Mr. Farrell’s words, “I believe that we will never do more than react to circumstances – piecemeal, incrementally and often inconsistently – unless we establish a realistic, factual basis for discussing our choices.”

“If we have the courage to move from the realm of generalized mythology to the specifics of 21st century reality, we might just succeed in shaping an energy future that is to our liking – instead of letting it shape us…The first step is unpacking the conversation and changing how we speak about energy.”

SABMiller plc has licensed Triple Point's flagship commodity logistics software. SABMiller will use Triple Point systems to optimize transportation costs and ensure the timely supply of raw materials, including barley and hops.

SABMiller is one of the world's leading brewers with operations and distribution agreements across six continents. The company's wide portfolio of brands includes premium international beers such as Pilsner Urquell, Peroni Nastro Azzurro, Miller Genuine Draft, and Grolsch. It is also one of the world's largest bottlers of Coca-Cola products. SABMiller is listed on the London and Johannesburg stock exchanges and reported group revenue of US$26.4 billion for the year ended 31 March 2010.

"Commodity management has always been a critical business process for energy, metals, and agriculture companies. Increasingly, it has become just as important for other industries with exposure to raw materials and energy, such as food and beverage, automotive, and high-tech," said Peter F. Armstrong, president and CEO, Triple Point. "For 17 years Triple Point has developed the leading software for customers to successfully manage the volatility, risk, and complexity of procuring, processing, moving, and marketing commodities. Triple Point's commodity management software enables food and beverage companies to make more informed and proactive decisions, streamline day-to-day operations, and protect profits."

SABMiller joins a notable list of food and beverage customers that have selected Triple Point commodity management software, including: The Campbell Soup Company, Chiquita, General Mills, Grupo Bimbo, and IFFCO.

I have seen a lot of press covering the recent report by the UN’s Food and Agriculture Organisation (FAO) noting that food prices have hit an all time high.

The FAO’s food price index, a basket tracking the wholesale cost of wheat, corn, rice, oilseeds, dairy products, sugar and meats, rose to 214.7 points which surpassed the previous record of 213.5 set in 2008 during the food crisis – remember riots in countries such as Egypt, Cameroon and Haiti.

The FT noted in an article that although food crises hit developing nations the hardest the “increase in food costs will also hit developed economies, with companies from McDonald's to Kraft raising retail prices."

But it was another policy brief about volatility in food prices by the FAO that caught my attention. “Recent bouts of extreme price volatility in global agricultural markets portend rising and more frequent threats to world food security.”

High prices and extreme volatility are the double whammy for corporations that need to deliver steadily rising and forecastable earnings to investors.

If you look at the driving factors cited by the FAO for volatility, none of them are going away soon. “Increased vulnerability is being triggered by an apparent increase in extreme weather events and a dependence on new exporting zones, where harvest outcomes are prone to weather vagaries; a greater reliance on international trade to meet food needs at the expense of stock holding; a growing demand for food commodities from other sectors, especially energy; and a faster transmission of macroeconomic factors onto commodity markets, including exchange rate volatility and monetary policy shifts, such as changing interest rate regimes.”

Volatility is here to stay. Organizations with exposure to commodities (including energy) need to figure out how they will operate in a business environment marked by higher prices and extreme volatility. Putting the correct solutions in place will give companies a big advantage relative to organizations that maintain the status quo.

Attempting to cope with the ambitious time lines demanded by the Dodd-Frank Act, the CFTC went into high gear in December by promulgating 10 new rules. That put their total to over 40 rules related to DFA in five-month time span. To put this into perspective, prior to Dodd-Frank, the CFTC’s rulemaking averaged to only a little over 5 per year. The merits and faults of the rapidity of the CFTC’s rulemaking process has been the subject of many debates, but under current law, the deadlines stand and must be met.

December Proposed Rule Highlights

I won’t go into each and every rule that was proposed in December, but rather would like to highlight a few that I would consider very important. No, I’m not trying to trivialize the others; I just believe there are a few that are really high on many watch lists.
The Players Defined

How an entity is categorized will ultimately determine their specific regulatory requirements. Although Title VII of the Dodd-Frank Act provided basic definitions for Swap Dealer, Major Swap Participant and Eligible Contract Participant, it charged the CFTC and SEC to further define these entities.

Are You a Dealer?

The Swap Dealer definition did not really stray from what the legislators proposed. The
CFTC’s definition:

Swap dealers tend to accommodate demand for swaps from other parties;

Swap dealers are generally available to enter into swaps to facilitate other parties’ interest in entering into swaps;

Swap dealers tend not to request that other parties propose the terms of swaps; rather, they tend to enter into swaps on their own standard terms or on terms they arrange in response to other parties’ interest; and

Swap dealers tend to be able to arrange customized terms for swaps upon request, or to create new types of swaps at their own initiative.

If you meet the criteria, you’ll be required to register as a swap dealer. The proposed rule will permit an application to be designated as a swap dealer with respect to only specified categories of swaps or activities. So, being a swap dealer in one category of swap does not mean you are considered a swap dealer in other categories.

Pertaining to the definition of a Swap Dealer, the CFTC also established a De Minimis exemption as instructed by the DFA. In order to avoid the Swap Dealer classification an entity must satisfy all the following conditions:

The aggregate effective notional amount, measured on a gross basis, of the swaps that the person enters into over the prior 12 months in connection with dealing activities must not exceed $100 million.

The aggregate effective notional amount of such swaps with “special entities” (like governments) over the prior 12 months must not exceed $25 million.

The person must not enter into swaps as a dealer with more than 15 counterparties, other than security- based swap dealers, over the prior 12 months.

The person must not enter into more than 20 swaps as a dealer over the prior 12 months.

CFTC Chairman Gary Gensler stated that it wasn’t the intent to capture end users in the definition of swap dealers and felt that was reflected in the commission’s definition. Commissioner Scott D O'Malia brought up concerns in the energy market and whether entities currently categorized as producer/merchants will fall into the swap dealer category as a result of the rulemaking. The Commission admitted to not possessing a clear understanding of the complexity of the physical energy markets. The Commission is seeking comment from the energy sector to gain an understanding of factors that could influence the swap dealer definition.

Triple Point Technology won top honors in two categories in the 2010 Commodity Business Awards (CBAs); Excellence in Commodity Logistics and Commodity Trading and Risk Management (CTRM). The awards illustrate the depth and breadth of Triple Point's multi-commodity software platform.

The CBAs recognize talent and excellence throughout the commodity complex and address 20 key business disciplines under three award categories: Trading, Risk, and Portfolio Management; Commodity Market Development; and Commodity Transactions Management. Triple Point scooped two awards in Commodity Market Development which reward firms that have excelled overall and in specific sectors of the commodity complex -- trading, risk management, client advisory, and portfolio management.

"Awards are another point of affirmation that Triple Point provides the most advanced commodity management software," said Michael Schwartz, chief marketing officer, Triple Point. "It's gratifying to be consistently recognized by industry leaders including Gartner Inc., Deloitte, SAP, and Inc. Magazine to name just a few."

Triple Point was recently bestowed the following industry recognition: Gartner Inc., the world's leading information technology research and advisory firm, named Triple Point a 'leader' in the ETRM Magic Quadrant in 2009 and 2010. Triple Point earned its top position by leading the field in ability to execute and ranking second in completeness of vision. In 2010 Triple Point was recognized as the 51st fastest growing technology company by Deloitte for its 220% revenue growth over a five-year period. Triple Point was also named an SAP Pinnacle Award Winner and one of Inc. Magazine's fastest growing private companies for four consecutive years.

"Over the last decade, commodities have moved from a niche to a mainstream investment opportunity," said Guy Isherwood, awards patron and publisher/editor of Commodities Now magazine. "These Awards recognize and reward those companies making a significant impact on the way commodity business is conducted, as well as those institutions making a positive contribution to the development of markets, client responsibility, and investor satisfaction."

Adjudicated by Commodities Now magazine and numerous market specialists, CBA winners were announced at the inaugural ceremony held at Glaziers Hall in London, UK. The Awards were presented to Roger Walton, Triple Point's Vice President of Field Operations, EMEA.

Triple Point's chartering and vessel operations software is based on mature, well-tested products obtained in its acquisition of Softmar -- now the chartering and vessel operations division of Triple Point. The shipping division serves over 80 blue-chip clients and more than 2500 users throughout North America, South America, Asia, and Europe.

Olam International is a leading global supply chain manager of agricultural products and food ingredients. Olam is a supplier to manufacturers of many of the world's most recognized international brands, and its unique "total solutions" approach has earned it a global reputation as the "Brand behind the Brands." Olam has been named to the 2009 and 2010 Forbes Asia "Fabulous 50," an annual list of 50 big-cap and most profitable firms.

"Olam's selection of Triple Point is clear affirmation of our ability to help world-class agribusinesses manage any and all aspects of their commodity operations," said Peter F. Armstrong, president and CEO, Triple Point. "The need for sophisticated enterprise risk management, trading, procurement, and logistics solutions have never been greater in the Asian markets. Triple Point alone has the functional depth and breadth to measure, manage, and report on both trading and shipping for an integrated view of commodity management. We're honored to welcome Olam as a customer."